The Land Reform (Scotland) Act Part 10 – Agricultural Holdings

The Stage 3 debate on the Land Reform (Scotland) Bill took place on 16th March 2016. Shortly afterwards, the Land Reform (Scotland) Act 2016 (“the Act”) received Royal Assent and the majority of the Act will be brought into force by the Scottish Ministers by regulations.

The Act comprises eleven parts of which only one part relates to agricultural holdings, but that one part constitutes well over half of the Act.

The Act deals with agricultural tenancies as follows:

Tenant Farming Commissioner

There is to be a new office of Tenant Farming Commissioner (“TFC”). The TFC is intended to:

Prepare and promote codes of practice

Inquire into alleged breaches of codes of practice

Prepare a report on the operation of agents of landlords and tenants

Prepare recommendations for a modern list of improvements to agricultural holdings

Refer question of law to the Land Court

Collaborate with the Land Commissioners (also created by the Act) in the exercise of their functions insofar as relating to agricultural matters

The TFC is to exercise his functions with a view to encouraging good relations between landlords and tenants of agricultural holdings.

Codes of practice are to be prepared by the TFC to provide practical guidance to landlords and tenants of agricultural holdings and their agents. The TFC is to promote observance of the codes of practice by educating, advising and working in collaboration with other parties. Nothing is said in the Act as to how such projects will be funded. The Land Court is directed to take into account any provision of a code of practice that is relevant to any question arising in proceedings before them in determining that question.

The Act also provides that the TFC has an “inquiry function” in respect of alleged breaches of a code of practice raised by a potentially affected party (the applicant). The TFC is to make inquiry and to charge a fee, which can be waived if the applicant can demonstrate “undue hardship”. “Undue hardship” is not defined.

The TFC has power to impose a “non-compliance penalty” of up to £1,000 for failure to provide information to the TFC for the purpose of an inquiry; failure to provide additional information; failure to provide, in the TFC’s opinion, sufficient information in the original application; or failure to provide a response to an application intimated to an interested party by the TFC. Strangely, there is no power to impose penalties or other sanctions if, on conclusion of an inquiry, the TFC finds a party in breach of the code of practice.

The TFC is required to produce a report on his inquiry and it is admissible as evidence in the Land Court or other judicial proceedings but will otherwise be confidential. It remains to be seen whether the TFC’s very limited powers will be of assistance to landlords and tenants in an industry heavily regulated by statute and where disputes are often legal in nature as a result.

The TFC is to prepare a report on the operation of agents of landlords and tenants in relation to agricultural holdings within 12 months of the relevant section coming into force. The report must include such recommendations as the TFC considers necessary to improve the operation of agents of landlords and tenants in relation to agricultural holdings.

New Modern Limited Duration Tenancies

A new form of Limited Duration Tenancy (“LDT”), to be known as a “Modern LDT”, is to be created for future agricultural lets of 10 years’ duration or longer.

Modern LDTs do not appear to be radically different from current LDTs (which it will no longer be possible to enter into) and replace the LDT before the first LDTs have even reached the end of their natural term. The statutory minimum term (10 years) remains unaltered and there remains no option for the willing landlord and willing tenant to agree a term of between five and 10 years. The landlord will require to give a double notice to terminate a Modern LDT as required to terminate an existing LDT. It is disappointing that the Review Group’s recommendation to simplify notices to terminate LDTs has not been adopted and the different notice requirements for landlords and tenants might be taken by some landlords as a disincentive to let, particularly as Modern LDTs will continue on cycles of seven years where not properly terminated by either party on notice.

It will be possible to grant a Modern LDT to a new entrant with a (qualified) break at year five. “New entrant” is not defined in the Act. Only the new entrant tenant is truly able to break the Modern LDT at year 5 on a commercial basis. The landlord’s right to do so is so heavily qualified as to be of extremely limited value.

The Act continues the confusing and potentially punitive terms of the 2003 Act concerning conversions from one form of agricultural let to another. It does helpfully clarify that when a five year Short Limited Duration Tenancy (“SLDT”) converts to a 10 year Modern LDT as a result of the continued occupation of the tenant and consent of the landlord, the 10 year term commences from the start date of the SLDT. The Act remains unclear as to when a 10 year Modern LDT commences when created by a series of SLDTs comprising a total aggregate period of occupation of more than five years.

The requirement to provide a Schedule of Fixed Equipment is restated in the Act with regard to Modern LDTs, in a similar manner to the existing law of fixed equipment in relation to LDTs. There remains no penalty for failing to provide a schedule. It will be possible to contract out of the requirement that the landlord will renew or replace fixed equipment required as a result of natural decay or fair wear and tear.

Grounds of irritancy for Modern LDTs are broadly similar to LDTs, but the landlord is required to give the tenant a pre-irritancy warning notice specifying the period within which the tenant must remedy the breach, which period must be not less than 12 months. The period may be extended by agreement or by the Land Court on the application of the tenant. A second notice must be given by the landlord not less than two months before the date on which the tenant is to be removed.

It will be possible to convert a 1991 Act Tenancy or an LDT into a Modern LDT by agreement made not less than 30 days before the agreement is to have effect. This can only happen where the new tenancy comprises or includes the same land as that comprised in the tenancy being terminated.

Repairing Tenancies

A “Repairing Tenancy” can be created where agricultural land is let under a lease for a term of not less than 35 years. During the “repairing period”, which will comprise the first five years of the lease or such longer period as may be agreed or be fixed by the Land Court, the tenant cannot be held liable for not farming the land in accordance with the rules of good husbandry.

A Repairing Tenancy is terminated, continued and extended on the same basis as a Modern LDT. The provisions relating to fixed equipment are similar to those applying to Modern LDTs with the exception that the statutory obligations with regard to maintenance, renewal and replacement of fixed equipment do not apply until the expiry of the repairing period.

The landlord under a Repairing Tenancy is not permitted to resume land from the tenancy until 5 years have elapsed from the date of expiry of the repairing period. Thereafter, the provisions of Section 17 of the 2003 Act apply to resumption as with SLDTs and Modern LDTs. The same provisions apply to irritancy of a Repairing Tenancy as apply to Modern LDTs with the addition of a prohibition on irritancy on the grounds that the tenant is failing to farm in accordance with the rules of good husbandry during the repairing period.

1991 Act Tenant’s Right to Buy

The Act removes the 1991 Act tenant’s requirement to register a right to buy in order to be able to exercise this right on the relevant circumstances arising (e.g. on the landowner taking steps with a view to a sale). A tenant is to have a pre-emptive right to buy simply by virtue of being a 1991 Act tenant. The fact that the landlord (or even the tenant) may not be aware that there is a 1991 Act tenancy, or that the extent of the land comprised in that 1991 Act tenancy is not agreed, is not considered. This provision will make it very difficult for landlords to take action with a view to the transfer of land they own without first establishing the nature and extent of any tenancy that may possibly affect the land, a matter that can only be resolved by expensive legal processes.

The exemption that allowed land to be transferred where the contract relating to the transfer was entered into prior to the tenant registering a right to buy has been repealed. This means that any landlord who has a concluded contract to sell land that is subject to a 1991 Act tenancy must take great care not to trigger the right to buy by any action under that contract. This potentially creates a major impediment to the sale of rural land for housing and other forms of development.

No attempt has been made to clarify the triggers of the agricultural tenant’s right to buy.

Right to Buy for Tenants Where Landlord in Persistent Breach

In circumstances where the landlord under a 1991 Act tenancy fails to comply with an order or award of the Land Court or an arbiter requiring that the landlord remedies a material breach of his obligations in relation to the tenant, the tenant can apply to the Land Court for an “Order for Sale”. An Order for Sale is defined as a right to buy the land comprised in the lease.

The Land Court may make an Order for Sale if satisfied that the landlord has failed to comply with the Court’s order or award in a material regard; that the failure substantially and adversely affects the tenant’s ability to fulfil his responsibilities to farm in accordance with the rules of good husbandry; that greater hardship would be caused by not making the Order than by making it; and that in all the circumstances it is appropriate. There are anti avoidance procedures to prevent landlords deliberately entering into arrangements with a view to avoiding being able to sell the land to the tenant.

Where an Order for Sale is made the tenant has a right to buy the land in respect of which the Order is made. The price is to be fixed by agreement or generally in accordance with the valuation and sale procedures for the existing 1991 Act tenant’s right to buy.

Where a tenant’s right to buy is extinguished through the failure of the tenant to give notice at the relevant time; to conclude missives; or to pay the price timeously the tenant may apply to the Land Court to allow the land to be offered for sale on the open market. If the Land Court grant such an order the sale will be conducted in accordance with procedures set out in regulations to be made by the Scottish Ministers. The third party purchaser’s ability to terminate the tenancy will be restricted for a period of 10 years from the date of acquisition.

Where the tenant, or a third party purchaser who bought the land, sells the land before the end of a period of 10 years from the date of acquisition but at a price higher than that paid to the original landlord, the original landlord is to be paid a proportion of the difference in value varying from 100% where the sale takes place in the first five years to 33% where the sale takes place after eight years. The Scottish Ministers may make further regulations specifying increases in value that are to be excluded and for payments where part only of the land is sold.

This provision is potentially helpful in the event of persistent and serious wrongdoing by a landlord affecting a 1991 Act tenant, but is potentially a very time consuming and expensive remedy for the tenant to utilise, with opportunities at various stages in the procedure for the landlord to correct the position and avoid an Order for Sale.

Rent Review

The Act sets out a new detailed framework for the review of rent under 1991 Act tenancies. It also expands on the statutory alternative for rent review under LDTs and Modern LDTs where there is no valid rent review provision in the lease.

1991 Act Tenancies

In respect of 1991 Act tenancies, the Act changes the particulars which must be included in a rent review notice. The notice must include certain information including a statement of the rent that the person serving the notice proposes should be payable. The notice must be accompanied by information explaining the basis on which the proposed rent has been calculated.

A rent review notice cannot be withdrawn without the consent of the recipient.

The new rent is to take effect from a “rent agreement date” to be specified in the rent review notice and which is to be no less than 12 months and no more than 2 years from the date on which the notice is served.

In the absence of agreement, either party (i.e. not just the party who gave notice) may apply to the Land Court to determine the rent provided that such application is made prior to the rent agreement date.

The Land Court is to consider the “fair rent” for the holding having regard in particular (presumably not exclusively) to the productive capacity of the holding; the open market rent of any surplus residential accommodation provided by the landlord; and the open market rent of any fixed equipment provided by the landlord or of any land forming part of the holding not used for agriculture.

“Productive capacity” is not defined in the Act but the Scottish Ministers may make regulations including as to how the productive capacity of an agricultural holding is to be determined.

Residential accommodation is surplus to the extent that it exceeds what is necessary to provide accommodation for the standard labour requirement of the holding, as determined by the Land Court, with the Scottish Ministers also being able to make provision by regulations as to the determination of the standard labour requirement.

The Land Court is given the power, on the application of the landlord or the tenant, to phase in the reviewed rent where the new rent is 30% or more higher or lower than the current rent. If the Land Court determines that the reviewed rent would cause undue hardship to landlord or tenant the rent adjustment shall be phased in at the rate of one third of the adjustment per annum. The effect of phasing on the rent review triennium is not clear.

It is unhelpful to have the new test partly defined by statute and partly undefined and with ambiguous reference to the Court “having regard in particular” to certain aspects, without clarifying what else they might have regard to, or indeed if the Court can have regard to any other factors brought before it which the Court at its discretion considers reasonable. It is difficult to see this provision making the rent review process any less cumbersome than it is at present.

Rent Review in LDTs, Modern LDTs and Repairing Tenancies

In terms of the existing legislation, in the event that there is no rent review provision in the lease, or the lease makes provision for an upward only rent review or landlord only initiated rent review, a statutory alternative applies.

The Act expands upon the terms of the statutory alternative in the event that it is required. The same information requires to be included in the notice as with a 1991 Act tenancy and the same factors are to be taken into account by the Land Court in setting the rent. In the circumstances of the uncertainty surrounding the new statutory rent review process and the lack of detail afforded by the Act the parties may be best advised to incorporate their own contractual rent review provisions.

Assignation and Succession Rights for Tenants

The Act strengthens the rights of 1991 Act tenants, existing tenants under LDTs and future tenants under Modern LDTs and Repairing Tenancies in respect of both lifetime assignation and succession to agricultural leases following the death of the tenant. The Act considerably widens the category of potential acquirer/assignee under all three forms of tenancy and narrows the grounds of objection which may be raised by the landlord to a “near relative successor” in each case.

Assignation

The Act proposes that the 1991 Act tenant has a choice of assignee (i.e. without following any particular order) within a much broader class of potential assignee, as remote as the descendant of a step brother or step sister of the assignor. This will be helpful for 1991 Act tenants and increases their succession planning options, but it is important to note that the class of “near relative” although considerably widened compared with the existing legislation, is not as wide as the class of potential assignees.

The landlord has only three very limited grounds of objection to a proposed assignee who is a “near relative”: (1) that the person is “not of good character”; (2) that the person has insufficient resources to farm with reasonable efficiency; and/or (3) that the person has insufficient training or experience (which does not apply where the proposed assignee can demonstrate he will be undertaking training). “Not of good character” is not defined in the Act.

With regard to existing LDTs, the Act does not adjust the current statutory right of a landlord to “step in” as assignee provided he can demonstrate that he can offer terms no less favourable than those the proposed by the assignee. The step in right does not apply to Modern LDTs or to Repairing Tenancies.

Succession

The categories of those to whom a tenant under an 1991 Act tenancy, LDT, Modern LDT or Repairing Tenancy can bequeath his tenancy is expanded in the same way as the list of proposed assignees (i.e. as far as a descendant of a step brother or step sister). Again the definition of “near relative” successor is expanded, but not as far as the categories of proposed legatees.

The grounds on which a landlord can object to a “near relative” successor are narrowed to the same three grounds of objection as for a “near relative” assignee (above).

Importantly, the current statutory provision which enables landlords in certain restricted circumstances to serve a notice to quit on a successor is repealed.

1991 Act Tenants’ Right to Relinquish and Assign Holdings

This is a new right and replaces the proposed right to assign a 1991 Act tenancy which would, on being assigned, convert into an LDT of a fixed duration (as had been recommended by the Review Group).

The tenant may offer to relinquish the tenancy by giving notice to the landlord (and copying the notice to the TFC). Such notice cannot be given in certain circumstances such as where the tenant has failed to comply with a demand to pay rent within two months, to remedy a relevant breach in the tenancy or where certain notices to quit have been served.

During the period of one year from service of the notice of intention to relinquish the landlord’s ability to serve a notice to quit is restricted.

The TFC appoints a valuer whose appointment can be challenged on limited grounds by either landlord or tenant. The tenant is responsible for meeting the valuer’s expenses. The valuer is to assess the value of the holding if sold (a) with vacant possession and (b) with the tenant still in occupation and the amount of compensation the landlord and the tenant would be entitled to on termination of the lease.

In valuing the land the valuer is to have regard to the value that would be agreed between a willing buyer and a willing seller and to take into account when vacant possession of the land would in the normal course of events have been recovered by the landlord. There is a lengthier list of disregards.

The amount payable by the landlord to the tenant is assessed by deducting the tenanted value of the land from the vacant possession value of the land and dividing the resultant figure by two. Any compensation due to the tenant is added and any compensation due to the landlord is deducted. Either party may appeal the resultant notice of assessment to the Lands Tribunal.

The tenant can withdraw his offer to relinquish within 35 days of the date of service of the notice of assessment and the landlord has 28 days following the expiry of that 35 day period to accept the tenant’s notice of intention to relinquish.

Where the landlord does not accept the tenant’s notice of intention to relinquish, the tenant may, before the expiry of one year from the date the landlord’s right to accept expired, assign the lease to an individual “who is a new entrant to, or who is progressing in, farming”. Neither “new entrant” nor “progressing in farming” is defined in the Act.

The landlord has limited rights to object to the assignee. The Scottish Ministers may by regulations provide that partners in limited or other partnerships may enforce the rights of tenants to relinquish or assign their leases.

Qualified Amnesty for Tenants’ Improvements

The Act provides an “Amnesty Period” (three years from the date the new legislation comes into force) during which tenants under 1991 Act tenancies, SLDTs, LDTs or Modern LDTs may give an “amnesty notice” to their landlord. Such a notice would relate to certain improvements carried out by the tenant prior to the legislation coming into force and where the relevant notification procedures were not followed.

An “amnesty notice” must be given in writing and contain certain specified information. The landlord may object within two months of receipt of the amnesty notice but only on restricted grounds namely: (a) that it is not fair and equitable for compensation to be paid for the relevant improvement at waygo; (b) that the landlord carried out the improvement in whole or in part; or (c) that the landlord gave or allowed a benefit to the tenant for carrying out the improvement. Presumably notices will also be objectionable if incompetent (e.g. if the category of improvement is not covered in the Act). “Fair and equitable” is not defined in the Act which is unhelpful. There is a right of recourse to the Land Court by the tenant where the landlord gives notice of objection which is likely to be utilised where such a broad and unspecific ground of objection exists in the legislation.

If the notice is not successfully challenged, past would-be improvements may be taken into account as part of the tenant’s waygoing claim in circumstances where the notice requirements under the relevant legislation had not been complied with.

The Act does not widen the class of what might constitute a tenant’s improvement. As mentioned above the TFC has been tasked with preparing recommendations for a modern list of improvements to agricultural holdings.

New Requirements for Landlords’ Improvements

Landlords of 1991 Act tenancies will be required to give notice to tenants of improvements the landlord proposes to carry out setting out certain key information. The tenant has a right of objection within two months of receipt of a landlord improvement notice. The landlord may apply to the Land Court for approval of the improvement which the Land Court may grant or reject, with or without conditions. Before approving an improvement the Land Court must be satisfied that the proposed improvement is necessary to enable the tenant to fulfil his responsibilities to farm in accordance with the rules of good husbandry.

A similar process exists for landlord improvement notices in respect of SLDTs, LDTs, Modern LDTs and Repairing Tenancies.

The process does not apply where an improvement needs to be carried out in an emergency, e.g. to protect the public from hazards which constitute a danger to human health.

Where a landlord erects an improvement without going through the new statutory process, and the improvement is not an emergency improvement, it is disregarded for the purpose of assessing the tenant’s responsibilities in respect of farming in accordance with the rules of good husbandry, with regard to the maintenance of fixed equipment and in any subsequent rent review.

Irritancy of SLDTs and LDTs

Notice to irritate an SLDT or LDT on the grounds of non-payment of rent may not be given unless the landlord has previously given the tenant a demand in writing requiring that the tenant pay the rent due within two months and that demand is not complied with. This change will apply to all existing SLDTs and LDTs as well as to future leases and, in the case of existing leases, is another major retrospective change to the contractual terms agreed between landlord and tenant which further restricts the ability of the landlord to remove a tenant who breaches or persistently breaches the terms of the lease.

Small Landholdings

The Scottish Ministers are required to review the legislation governing small landholdings and to lay a report of that review before the Scottish Parliament no later than 31st March 2017.

Conclusions

There was much criticism about the making of major changes to agricultural holdings law through a land reform Act, rather than agricultural holdings Act, and about the number of provisions of the Act on which the Act contains little or no detail, with that detail to come from subordinate legislation at a later date. There is considerable evidence of the Act having being rushed to meet a parliamentary deadline and with little or no debate on what are major issues.

In his Ministerial foreword to the Agricultural Holdings Legislation Review Group’s Final Report (which set the scene for the Act), the Cabinet Secretary made it clear that there was a political desire to reform the tenanted sector in Scotland and to make more agricultural land available for letting and said: “We need to ensure we address the issues facing existing tenants and, at the sametime, ensure a supply of tenanted land that supports new entrants and new investment intoagriculture.”. In the policy memorandum relating to the Act it is noted that since 1982 there has been a 44% decrease in the area of let land, resulting in Scotland now having one of the lowest proportions of rented land anywhere in Europe.

Many will believe that the Act contains little if anything to encourage the letting of land and much to discourage it, and to this extent the Act fails to meet the policy objectives assigned to it. The Act is perhaps another opportunity missed in the search for a vibrant tenanted sector in Scottish Agriculture.